I have no pretensions of being an economist. I completed an honours course in economics at Delhi University, but that was half a century ago. By a quirk of fate, I spent nearly two decades dealing with foreign trade in various capacities with the Kerala Government and the Government of India. I am bewildered by Donald Trump’s antics that threaten the very fabric of the global economy. He imposed tariffs, then kept them on hold when he found he was losing the game, yet continued with a 125 percent tariff on his most significant trading partner, China.
Trump is obviously very angry. He feels that the entire world, particularly China, has conspired to rob the US. To teach these ‘rogues’ and ‘thieves’ (he used the word ‘thieves’ repeatedly) a lesson, he decided to come down on them like a ton of bricks. He announced the imposition of what he calls “reciprocal tariffs” on all countries, with a minimum of 10 percent and a maximum yet to be determined. When China dared to challenge him and impose equal counter-tariffs, he raised the tariff on them to 125 percent.
I fail to understand how he deems these tariffs “reciprocal.” A reciprocal tariff, or retaliatory tariff in WTO parlance, is intended to correct a wrong committed by a country that violates a multilaterally or jointly agreed tariff. In this case, all tariffs have been established multilaterally after several years of rigorous negotiations by all countries, including the US. What Trump means by “reciprocal tariffs” is that no country should dare to maintain a trade surplus with the US. For example, the US buys more goods from China than it sells to them — creating a goods deficit of $295 billion. The total value of goods the US imports from China is $440 billion. Dividing 295 by 440 results in 67 percent, and when divided by two, it leads to an imposed tariff of 34 percent on China. Similarly, a tariff is calculated for each country. Even when there is no surplus, the respective country must still pay a minimum tax of 10 percent, ostensibly to ensure Trump has adequate revenue to reduce income taxes.
To think that any surplus in the trade balance is on account of the other party cheating the US seems to be somewhat naive. The comparative advantage of countries determines trade flows globally, including the costs of production, which, by itself, is a reflection of the cost of raw materials and factors of production and technological advantage. Knowing this well, the US has long been a votary of free trade. The multilateral trading system slowly but surely moved towards it, considering the sensitivities of other countries, particularly developing and least-developed countries.
There seemed to be unexplained errors in calculation, too. For example, Switzerland exported goods worth $74 billion to the US and imported goods worth $25 billion in 2024, resulting in a difference of $49 billion. Out of this deficit, $35 billion is on pharmaceuticals, which is totally exempt. Hence, according to Trump’s formula, the tariff on them should have been $14 billion divided by $25 billion, yielding a tariff figure of about 25 percent after applying Trump’s discount factor. Yet American importers would have had to pay a 31 percent tariff on Swiss chocolate, cheese and watches.
I suspect that Trump pressured his officials to expedite the process so he could announce it on April 2. Consequently, they had to conduct a hasty and poorly executed analysis that was challenging to justify logically in every instance. They covered their shortcomings by stating that the imposed tariff is a mix of tariff barriers, non-tariff barriers, currency manipulation, and other factors. The US is dealing with independent countries, not subordinate states or colonies. The methodology behind these calculations should be transparent.
I also struggle to understand his motivations. This is not the first time he has manipulated tariffs; they are one of his preferred tools. On his social media platform, TruthSocial, he stated, “Someday, people will realise that TARIFFS, for the United States of America, is a very beautiful thing.” This is also not the first instance he has engaged in this practice. During his first term in 2018, he imposed tariffs on steel, aluminium, washing machines, and solar panels in six waves. Scholars have studied this and concluded that nearly the entire burden of these tariff increases was borne by American consumers, leading to a reduction in real income and welfare. As inflation rises in response to tariffs on nearly all items, monetary measures will be imperative to restore order in the economy. This will also affect the dollar, making it an unstable currency and resulting in the very outcome that Trump does not want: the decline of dollar-denominated global trade.
The wild fluctuations of the Nasdaq and Dow indices and the panic in global stock markets in the days following Trump’s announcement indicate significant apprehension in the US and worldwide. Not only stock prices but also the values of gold and oil fell sharply. The order established through a controlled multilateral trading system has dissipated, and confidence is at a low ebb. Even informed American consumers are alarmed, recalling the financial bloodbath during the Great Depression, which also began with a major stock market crash in October 1929. Trump urged his supporters to be brave but ultimately seems to have realised that the whole world will not bow to him in obeisance.
The imposition of multiple tariffs disrupted the comparative advantages in trade that certain countries enjoyed vis-a-vis one another. For instance, while India may have gained advantages over Bangladesh, Pakistan, and China in exporting textiles and garments, it may find itself at a disadvantage compared to Ecuador in exporting marine products to the US. Even this comparative advantage may not be realised immediately due to capacity constraints. Besides, all these relative advantages may change after negotiations. Hence, the present situation is still fluid, not final or certain.
Thus, Trump’s irrational behaviour threatens the whole world, particularly the United States. This is an occasion for all the countries in the world to band together in the WTO and restore the sanctity of multilaterally agreed tariffs and the power of the agreed dispute settlement mechanism to enforce it.
(Views are personal)
(kmchandrasekhar@gmail.com)
K M Chandrasekhar | Former Cabinet Secretary and author of As Good as My Word: A Memoir